BSkyB/ITV: Competition Appeal Tribunal Dismisses …

1 ARTICLEVol 17 Issue 2 ULR: bskyb /ITV: Competition Appeal Tribunal CARTLIDGE AND BRODERICK47 bskyb /ITV: Competition Appeal TribunalDismisses bskyb s AppealHoward Cartlidge and Dervla BroderickOlswang, LondonUTILITIES LAW REVIEW PUBLISHED BY LAWTEXT PUBLISHING September 2008, the Competition Appeal Tribunal ( CAT )handed down its judgment1 dismissing in its entirety thechallenge by British Sky Broadcasting Group Plc ( bskyb ) tothe Competition Commission ( the CC ) report on bskyb sacquisition of a per cent stake in ITV Plc ( the report ).2 According to the CAT, bskyb identified no defect in the CC sfinding that the acquisition resulted in a relevant mergersituation which gave rise to a substantial lessening ofcompetition.

2 The CAT also rejected bskyb s application in sofar as it related to the decision by Secretary of State for BusinessEnterprise and Regulatory Reform ( the Secretary of State )ordering the partial divestment of bskyb s interest ( thedecision ).3 However, the CAT did uphold the challenge by VirginMedia Inc. ( Virgin ) to the CC s finding that bskyb s acquisitionwould not operate against the public interest in addition toraising Competition concerns. The CAT found that the CChad misdirected itself in its interpretation of sections 58 and58A of the Enterprise Act 2002 ( EA ) which deal with themedia plurality considerations. Having set aside the CC sconclusion on media plurality together with the correspondingSecretary of State decision, the CAT was required to examinethe impact of the ruling on the remedy proposed by the CAT concluded that the remedy remained valid and BSkyBwould, therefore, be required to reduce its shareholding in ITVPlc to per and Virgin both sought permission to Appeal tothe Court of Appeal against certain aspects of the CATjudgment.

3 The CAT rejected these applications in earlyDecember5 following which bskyb submitted an applicationto Appeal direct to the Court of Appeal . On 20 March 2009,the Court of Appeal granted bskyb permission to Appeal theCAT case as a whole is significant in a number of respects,not least for the noteworthy firsts it produced. It was the firsttime the government used its powers under section 42 of theEA to intervene in the usual merger control process6 and it isthe first time the media plurality provisions in section 58 EAhave been applied. However, while the CAT judgment is usefulin providing clarification on the correct interpretation of theseprovisions, perhaps more important from a Competition lawperspective are the implications it can be expected to have forthe UK Competition authorities approach to assertingjurisdiction over acquisitions of minority shareholdings andhow this differs from the position under the EC merger , together with the issue of the limitations on the CAT sability to effectively review merger decisions, is discussed inmore detail below.

4 First, however, this article provides asummary of the background to the Appeal and the ReferenceOn 17 November 2006, bskyb (the leading UK pay-tvbroadcaster) announced that it had acquired 696 million sharesrepresenting per cent of ITV Plc shares for a total of 940 million. ITV Plc is the United Kingdom s biggestcommercial broadcaster, broadcasting a range of free-to-air( FTA ) channels. The government used its powers undersection 42 EA to intervene in the usual merger control process,by issuing an intervention notice to the Office of Fair Trading( the OFT ) stating that the EA s media public interestconsideration was, or could be, relevant to this case. bskyb sbiggest shareholder is News Corporation, owner of the UnitedKingdom s biggest newspaper group, News the public interest intervention regime the Secretaryof State (not the OFT) has the discretion as to whether or notto refer a merger to the CC for an in-depth review, to clear itunconditionally or to clear it subject to undertakings.

5 In doingthis, he must accept the OFT s recommendations as regardsany Competition concerns raised by the transaction, but can1 British Sky Broadcasting Group Plc v (1) The CompetitionCommission (2) The Secretary of State for Business, Enterprise andRegulatory Reform supported by Virgin Media, Inc; Virgin Media, Incv (1) The Competition Commission (2) The Secretary of State forBusiness, Enterprise and Regulatory Reform supported by British SkyBroadcasting Group Plc [2008] CAT 25 (the CAT judgment) .2 Acquisition by British Sky Broadcasting Group Plc of percent of the shares in ITV Plc, report sent to Secretary of State (BERR)14 December decisions by the Secretary of State for Business, Enterprise& Regulatory Reform on British Sky Broadcasting Group s acquisitionof a per cent shareholding in ITV Plc dated 29 January Media, Inc and (1) The Competition Commission (2) TheSecretary of State for Business, Enterprise and Regulatory Reform andBritish Sky Broadcasting Group Plc [2008] CAT Sky Broadcasting Group Plc v (1) The CompetitionCommission (2) The Secretary of State for Business, Enterprise andRegulatory Reform supported by Virgin Media, Inc.

6 Virgin Media, Incv (1) The Competition Commission (2) The Secretary of State forBusiness, Enterprise and Regulatory Reform supported by British SkyBroadcasting Group Plc [2008] CAT second occurred in autumn 2008, when the Secretary of Statespecified the stability of the UK financial system as his reason forstepping in to examine the acquisition of HBOS Plc by Lloyds the decision by Lord Mandelson, the Secretary of State for BusinessEnterprise and Regulatory Reform, not to refer to the CompetitionCommission the merger between Lloyds TSB Group Plc and HBOSPlc under section 45 of the Enterprise Act 2002 dated 31 : Competition Appeal Tribunal CARTLIDGE AND BRODERICK: Vol 17 Issue 2 ULRARTICLEUTILITIES LAW REVIEW PUBLISHED BY LAWTEXT PUBLISHING that the public interest considerations override any suchcompetition Having considered reports by the OFT8and Ofcom,9 as well as other representations, the Secretary ofState announced his decision to refer bskyb s acquisition tothe CC for investigation on 24 May reference was made under section 45(2)

7 Of the EAon the basis that a relevant merger situation had been createdwhich may have been expected to result in a substantial lesseningof Competition , that a public interest consideration was relevantto the consideration of the merger and that, taking accountonly of the substantial lessening of Competition and therelevant public interest consideration, the merger operated ormay have been expected to operate against the public media public interest consideration specified by theSecretary of State was the need, in relation to every differentaudience, for there to be a sufficiency of plurality of personswith control of the media enterprises serving that audience(section 58(2C)(a) EA).The CC s FindingsAfter an investigation which extended over nearly six months,the CC found that the acquisition gave bskyb the abilitymaterially to influence the policy of ITV Plc such that, theturnover test under section 23(1) EA also being satisfied, arelevant merger situation had been created.

8 The CC took thepolicy of ITV Plc in this context to mean the management ofits business, in particular in relation to its competitive conduct,including its strategic direction and its ability to define andachieve its objectives. The CC found that the size of bskyb sholding was such that on the basis of past voting patterns itwould be able to block special resolutions proposed by ITVPlc s management and this ability would limit ITV Plc s strategicoptions, for example its ability to raise funds. The CC alsohighlighted bskyb s importance and stature as an industryplayer. Together with its position as the largest shareholder,this was considered to give additional weight to its views,increasing its ability to influence other ITV Plc regard only to the media public interestconsideration in subsection 58(2C)(a) EA, the CC concludedthat the acquisition would not be expected to operate againstthe public interest.

9 The CC considered that, given the extentof the influence conferred on bskyb , the regulatorymechanisms, combined with a strong culture of editorialindependence within television news production, were likelyto be effective in preventing any prejudice to the independenceof ITV Plc s news operations. As a result, the CC found thatBSkyB s influence over ITV Plc would not materially affectthe sufficiency of plurality of persons with control of mediaenterprises servicing audiences for , in assessing the competitive effects of theacquisition against the counterfactual of an independent ITVPlc, the CC found that bskyb would exercise its ability toinfluence ITV Plc s strategy so as substantially to lessencompetition in the market for all-television services (whichincludes both pay television and FTA television services).

10 Itidentified several examples of the ways in which, in practice,this might occur, for example seeking to influence ITV Plc sstrategy in relation to content production and commissioningand attempting to influence the course of any futuretransactions involving ITV Plc in order to weaken the constraintthat FTA television services would otherwise CC concluded that, based on its assessment of thecompetitive effects, overall the acquisition may be expected tooperate against the public interest. The CC consequentlyconsidered a number of remedy options which ranged fromfull divestment of bskyb s stake to the remedy finallyrecommended by the CC which involves divestment of suchpart of bskyb s shareholding in ITV Plc as to result in it ceasingto have material influence over ITV Plc, combined withbehavioural undertakings not to be represented on the ITVPlc board, not to dispose of shares to an associated personand not to re-acquire share in ITV Plc.